The Truth About Credit Card Reward Programs

Americans have a long-standing love affair with credit cards and banks have made their cards even more appealing through loyalty reward programs that promise everything from cash back to free flights, as long as you spend a certain amount.

"GMA" financial contributor, Mellody Hobson discusses the diminishing value of these programs and what pitfalls to look out for when choosing a rewards program credit card.

These reward programs have become commonplace in the credit card industry.

According to Affinity Solutions, a company that creates and manages such programs, 40 percent to 45 percent of all existing credit cards are linked to some sort of reward program.

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Unfortunately, as with most industries, the credit card industry has been hard hit by the faltering economy.

Why Companies Are Cutting Rewards Values

In order to cut their expenses related to these programs, issuers have taken actions to change the terms of their reward programs.

Changes include increasing spending thresholds for rewards, reducing the points earned for a purchase, increasing the points needed to redeem an award, or shortening point expiration periods. Some examples can be found with the most popular cards:

With the American Express Delta Skymiles card you used to get double miles for shopping in various categories, now you only get the mileage times one.

With the Citi-Premier-Pass you use to get 10,000 points just for signing-up, now you have to spend $300 in the first three months.

The Miles by Discover Card program now requires 10,000 miles for a $100 travel credit, when in the past you could start cashing-in with as little as 5,000 miles for a $50 travel credit.

With all these changes it is no wonder that points have become less valuable. According to Cardratings.com, the average reward point is worth one penny, and in cases where you are exchanging points for items, the amount can be worth even less.

Who Should Stay Away From Rewards Credit Cards

According to the most recent Federal Reserve stats, 46 percent of all American families carry credit card debt.

If you fall into this category, you should definitely consider other credit cards.

First, studies have shown that credit card users with reward programs spend twice as much as credit users without reward programs.

This leads to increasing your debt level.

Differences Between Programs

Credit cards with reward programs average a higher interest rate.
Credit card programs with reward programs average a higher interest rate than those without reward programs.

According to Bankrate.com this week, all variable rate credit cards averaged an APR of 10.8 percent, while cash-back cards averaged a rate of 13.9 percent.

So let's say you get 1 percent cash back on all purchases, and you spend $1,000, then you will get back $10. However, if you carry $500 of your purchase as a balance, then the difference in interest between the two cards for a year will be $15.50, so any advantage from the reward will be eliminated.

Who Benefits From These Programs?

Credit card reward programs are best suited towards those people who do not carry a balance, and therefore are not affected by the higher APR.

These people can really rack some major rewards based upon their spending. Secondly, reward programs are good for those consumers that actually spend the points.